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News releases

Announced today a 7% increase in the quarterly dividend from $0.30 per share to $0.32 per share. The dividend will be paid on March 8, to all shareholders of record as of Feb. 20, 2018. This is the fifth time the company has raised the dividend since initiating the quarterly dividend in July 2013, with a cumulative increase of 220% since that time.

Financial Highlights:

Reported net income for the fourth quarter and full-year under Generally Accepted Accounting Principles ("GAAP") of $367 million, or $2.97 per diluted share, and $1.0 billion, or $8.30 per diluted share. These results compare to fourth quarter 2016 net income of $114 million, or $0.92 per diluted share, and full-year 2016 net income of $814 million, or $6.54 per diluted share. As the acquisition of Virgin America Inc. (Virgin America) closed on Dec. 14, 2016, 2017 information reflects the results of Virgin America. 2016 information reflects the results of Virgin America from Dec. 14-31, 2016.

Reported fourth quarter 2017 adjusted diluted earnings per share of $0.83 compared to $1.56 reported in the fourth quarter of 2016. Fourth quarter adjusted net income, excluding merger-related costs, special income tax benefits related to tax law changes, and mark-to-market fuel hedging adjustments, was $103 million compared to $193 million in the fourth quarter of 2016. This quarter's adjusted results compare to the First Call analyst consensus estimate of $0.82 per share.

Reported full year 2017 adjusted net income, excluding merger-related costs, the special income tax benefit, and mark-to-market fuel hedging adjustments, of $823 million, compared to $911 million in 2016. Reported 2017 adjusted diluted earnings per share of $6.64, compared to $7.32 in 2016.

Paid a $0.30 per-share quarterly cash dividend in the fourth quarter, bringing total dividend payments in 2017 to $148 million.

Repurchased a total of 981,277 shares of common stock for approximately $75 million in 2017.

Generated approximately $1.6 billion of operating cash flow and used approximately $1.0 billion for capital expenditures, resulting in approximately $547 million of free cash flow in 2017.

Grew passenger revenues by 32% compared to the fourth quarter of 2016, and by 36% compared to full-year 2016, largely enabled by our acquisition of Virgin America in December of 2016.

Generated full-year adjusted pretax margin of 17% in 2017.

Held $1.6 billion in unrestricted cash and marketable securities as of Dec. 31, 2017.

Reduced debt-to-capitalization ratio to 51% as of Dec. 31, 2017, compared to 59% as of Dec. 31, 2016.

2017 Accomplishments and Highlights:

Recognition and Awards - Alaska

Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2017 by J.D. Power for the tenth year in a row.

Ranked first in the U.S. News & World Report's list of Best Travel Rewards Programs for the third consecutive year.

Won the "Best Rewards Program" for Alaska Mileage Plan for carriers in the "Americas" region in the sixth annual FlyerTalk Award.

Mileage Plan ranked Best Airline Elite Status Program in the U.S. by The Points Guy.

Ranked among Forbes' 2017 "America's Best Employers" for the third year in a row.

Received 16th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon's aircraft technicians for their commitment to training.

Ranked by AirlineRatings.com as one of only two U.S. airlines in the Top 20 safest airlines in the world.

Rated "Best Airline Staff in North America" and "Best Regional Airline in North America" by Skytrax World Airline Awards.

Awarded TripAdvisor's 2017 Travelers' Choice Award for second-best midsize and low-cost airlines in North America and one of the top 10 best airlines in the world.

Recognized by the Puget Sound Business Journal as the 2017 Board Diversity Champion, as well as by the Women Corporate Directors Global Institute for diversity among our Directors.

Ranked as the top U.S. airline in the Dow Jones Sustainability Index (DJSI), receiving perfect scores for "efficiency" and "reliability."

Recognized as No. 1 in fuel efficiency for U.S. airlines by the International Council on Clean Transportation for the 7th consecutive year.

Named one of the overall five-star major regional airlines at the Passenger Choice Awards during the APEX EXPO.

Ranked fifth of most engaged companies in the U.S. by Forbes Insights, which measured social media engagement, net promoter scores, and year-over-year sales growth.

Recognition and Awards - Virgin America

Rated Best U.S. Airline by Conde Nast Traveler in their "Annual Readers' Choice Awards" for the tenth year in a row.

Rated Best Domestic Airline in Travel + Leisure "World's Best Awards" for the tenth year in a row.

Received a five-star rating for low-cost carrier, and received a top honor with a Passenger Choice Award for "Best Seat Comfort" during the APEX EXPO.

Our People

Awarded $135 million in incentive pay to employees for 2017.

Awarded employees a $1,000 bonus in January 2018 in connection with the passing of the Tax Cuts and Jobs Act, amounting to approximately $25 million to be paid on Jan. 29, 2018.

Granted "Single Carrier Determination" by the National Mediation Board ("NMB") for Alaska Airlines and Virgin America, paving the way for labor integration and union representation. The NMB officially certified the Association of Flight Attendants as the union representative for Virgin America inflight teammates and the International Association of Machinists and Aerospace Workers as the union representative for Virgin America clerical, office and passenger service employees.

Entered into an agreement with the International Brotherhood of Teamsters to amend the eight-year contract with Horizon's pilots, providing Horizon the ability to attract and retain the best pilots in the regional industry.

Alaska received a perfect score of 100% for workplace equality on the 2018 Corporate Equality Index ("CEI"). Virgin America received a score of 95%.

Announced plans to fly 13 daily departures from Paine Field-Snohomish County Airport in Everett, Washington to eight West Coast markets starting in fall 2018.

Announced a seven-year partnership to be the official airline of the San Francisco Giants which includes, among other things, exclusive naming rights to the AT&T Park Club Level which will now be called the "Alaska Airlines Club Level."

Signed an exclusive multi-year partnership with Golden State Warriors star Kevin Durant naming him "Advisor to the CEO," and extended our partnership with Russell Wilson and Ciara.

Converted the world's first Boeing 737-700 from a passenger plane to a freighter and placed it into revenue service.

Added 44 new markets in 2017 across the Alaska Air Group and Virgin America networks.

Our Communities

Donated over $14 million and contributed more than 32,000 volunteer hours to support nonprofits in our local communities, focusing on youth and education, medical (research/transportation) and community outreach.

Alaska Air Group Inc. (NYSE: ALK) today reported fourth quarter 2017 GAAP net income of $367 million, or $2.97 per diluted share, compared to $114 million, or $0.92 per diluted share in 2016. Excluding the impact of merger-related costs, the special income tax benefit, and mark-to-market fuel hedge adjustments, the company reported fourth quarter adjusted net income of $103 million, or $0.83 per diluted share, compared to adjusted net income of $193 million, or $1.56 per diluted share in the fourth quarter of 2016.

The company reported full-year 2017 GAAP net income of $1,028 million, compared to $814 million in the prior year. Excluding the impact of merger-related costs, the special income tax benefit, and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $823 million, or $6.64 per diluted share for 2017, compared to adjusted net income of $911 million, or $7.32 per diluted share in 2016.

"2017 was a great year - we invested in our route network, our fleet, our product, and laid the foundation for our future," said Brad Tilden, Alaska's CEO. "We added 44 new routes to our network (in addition to the 38 added through Virgin America), grew membership in our loyalty program, and made great progress on our integration of Virgin America. By early spring, we'll have the bulk of the integration behind us, and working with our people to do more of what Alaska does best - running a highly reliable operation and offering our guests outstanding customer service."

The following tables reconcile the company's adjusted net income and earnings per diluted share ("EPS") during the full year and fourth quarters of 2017 and 2016 to amounts as reported in accordance with GAAP:

Three Months Ended December 31,

2017

2016

(in millions, except per share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

Reported GAAP net income and diluted EPS

$

367

$

2.97

$

114

$

0.92

Mark-to-market fuel hedge adjustments

(14)

(0.11)

(4)

(0.03)

Special items—merger-related costs

30

0.24

81

0.65

Income tax effect on special items and fuel hedge adjustments(a)

(6)

(0.05)

(15)

(0.12)

Special tax (benefit)/expense(b)

(274)

(2.22)

17

0.14

Non-GAAP adjusted net income and diluted EPS

$

103

$

0.83

$

193

$

1.56

Twelve Months Ended December 31,

2017

2016

(in millions, except per share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

Reported GAAP net income and diluted EPS

$

1,028

$

8.30

$

814

$

6.54

Mark-to-market fuel hedge adjustments

(7)

(0.06)

(13)

(0.11)

Special items—merger-related costs

118

0.95

117

0.94

Income tax effect on special items and fuel hedge adjustments(a)

(42)

(0.34)

(24)

(0.19)

Special tax (benefit)/expense(b)

(274)

(2.21)

17

0.14

Non-GAAP adjusted net income and diluted EPS

$

823

$

6.64

$

911

$

7.32

(a)

Certain merger-related costs in 2016 were non-deductible for tax purposes, resulting in a smaller income tax effect for prior year adjusting items.

(b)

The special tax benefit in 2017 is due to the remeasurement of deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, offset by certain state tax law enactments. The resulting net tax benefit is excluded from our adjusted non-GAAP earnings.

Statistical data, as well as a reconciliation of other reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

A conference call regarding the fourth quarter and full year results will be simulcast online at 8:30 a.m. Pacific time on Jan. 25, 2018. It can be accessed through the company's website at alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

References in this news release to "Air Group," "company," "we," "us" and "our" refer to Alaska Air Group Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc., Horizon Air Industries, Inc., and Virgin America Inc. are referred to as "Alaska," "Horizon," and "Virgin America" respectively, and together as our "airlines."

This news release may contain forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended Dec. 31, 2016, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance, or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines, together with Virgin America and its regional partners, flies 44 million guests a year to 115 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada, and Costa Rica. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in the J.D. Power North America Satisfaction Study for 10 consecutive years from 2008 to 2017. Learn more about Alaska's award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines, Virgin America and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

Amounts below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016.

Three Months Ended December 31,

Twelve Months Ended December 31,

(in millions, except per share amounts)

2017

2016

Change

2017

2016

Change

Operating Revenues:

Passenger

Mainline

$

1,468

$

1,062

38

%

$

5,858

$

4,098

43

%

Regional

235

226

4

%

960

908

6

%

Total passenger revenue

1,703

1,288

32

%

6,818

5,006

36

%

Freight and mail

26

26

—

%

114

108

6

%

Other - net

233

210

11

%

1,001

817

23

%

Total Operating Revenues

1,962

1,524

29

%

7,933

5,931

34

%

Operating Expenses:

Wages and benefits

532

374

42

%

1,924

1,382

39

%

Variable incentive pay

37

32

16

%

135

127

6

%

Aircraft fuel, including hedging gains and losses

396

238

66

%

1,447

831

74

%

Aircraft maintenance

120

73

64

%

391

270

45

%

Aircraft rent

70

34

106

%

274

114

140

%

Landing fees and other rentals

122

88

39

%

460

320

44

%

Contracted services

80

64

25

%

314

247

27

%

Selling expenses

88

63

40

%

357

225

59

%

Depreciation and amortization

97

82

18

%

372

363

2

%

Food and beverage service

50

33

52

%

195

126

55

%

Third-party regional carrier expense

37

21

76

%

121

95

27

%

Other

141

100

41

%

565

365

55

%

Special items—merger-related costs

30

81

(63)

%

118

117

1

%

Total Operating Expenses

1,800

1,283

40

%

6,673

4,582

46

%

Operating Income

162

241

(33)

%

1,260

1,349

(7)

%

Nonoperating Income (Expense):

Interest income

9

7

34

27

Interest expense

(26)

(22)

(103)

(55)

Interest capitalized

4

4

17

25

Other - net

—

1

(1)

(1)

Total Nonoperating Income (Expense)

(13)

(10)

(53)

(4)

Income Before Income Tax

149

231

1,207

1,345

Income tax expense

56

100

453

514

Special income tax benefit

(274)

17

(274)

17

Total Income Tax Expense/(Benefit)

$

(218)

$

117

$

179

$

531

Net Income

$

367

$

114

$

1,028

$

814

Basic Earnings Per Share:

$

2.98

$

0.92

$

8.34

$

6.59

Diluted Earnings Per Share:

$

2.97

$

0.92

$

8.30

$

6.54

Shares Used for Computation:

Basic

123.147

123.286

123.211

123.557

Diluted

123.670

124.102

123.854

124.389

Cash dividend declared per share

$

0.300

$

0.275

$

1.200

$

1.100

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

Alaska Air Group, Inc.

(in millions)

December 31, 2017

December 31, 2016

Cash and marketable securities

$

1,621

$

1,580

Total current assets

2,128

2,050

Property and equipment-net

6,284

5,666

Goodwill

1,943

1,934

Intangible assets-net

133

143

Other assets

234

169

Total assets

$

10,722

$

9,962

Air traffic liability

937

849

Current portion of long-term debt

307

319

Other current liabilities

1,456

1,367

Current liabilities

$

2,700

$

2,535

Long-term debt

2,262

2,645

Other liabilities and credits

2,045

1,851

Shareholders' equity

3,715

2,931

Total liabilities and shareholders' equity

$

10,722

$

9,962

Debt to Capitalization, adjusted for operating leases(a)

51%

59%

Number of common shares outstanding

123.061

123.328

(a)

Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date.

OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.

Consolidated and Mainline amounts presented below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016.

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The table below provides "Combined Comparative" results for the three and twelve months ended December 31, 2016, determined as the sum of the historical consolidated results of Air Group and of Virgin America. Virgin America's financial information has been conformed to reflect Air Group's historical financial statement presentation for each period presented. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.

Three Months Ended December 31,

Twelve Months Ended December 31,

2017

2016

2017

2016

(in millions, except operating statistics)

As Reported

Combined

Change

As Reported

Combined

Change

Combined Comparative Operating Results

Passenger revenue

$

1,703

$

1,587

7%

$

6,818

$

6,420

6%

Other revenue

259

267

(3)%

1,115

1,075

4%

Total Operating Revenues

1,962

1,854

6%

7,933

7,495

6%

Non-fuel operating expense

1,404

1,282

10%

5,226

4,800

9%

Fuel expense

396

302

31%

1,447

1,124

29%

Total Operating Expenses

1,800

1,584

14%

6,673

5,924

13%

Operating Income

162

270

(40)%

1,260

1,571

(20)%

Nonoperating income (expense)

(13)

(15)

(13)%

(53)

(23)

130%

Income Before Tax

149

255

(42)%

1,207

1,548

(22)%

Special items—merger-related costs

30

94

(68)%

118

138

(14)%

Mark-to-market fuel hedge adjustments

(14)

(4)

250%

(7)

(15)

(53)%

Adjusted Income Before Tax

$

165

$

345

(52)%

$

1,318

$

1,671

(21)%

Combined Comparative Operating Statistics

Revenue passengers (000)

10,971

10,382

5.7%

44,034

41,947

5.0%

RPMs (000,000)

13,265

12,084

9.8%

52,338

48,754

7.4%

ASMs (000,000)

15,901

14,404

10.4%

62,072

57,953

7.1%

Load Factor

83.4%

83.9%

(0.5) pts

84.3%

84.1%

0.2 pts

PRASM

10.71¢

11.02¢

(2.8)%

10.98¢

11.08¢

(0.9)%

RASM

12.34¢

12.87¢

(4.1)%

12.78¢

12.93¢

(1.2)%

CASMex

8.64¢

8.25¢

4.7%

8.23¢

8.04¢

2.4%

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

Amounts below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016.

Three Months Ended December 31, 2017

(in millions)

Mainline

Regional

Horizon

Consolidating & Other

Air Group Adjusted(b)

Special Items(c)

Consolidated

Operating revenues

Passenger

Mainline

$

1,468

$

—

$

—

$

—

$

1,468

$

—

$

1,468

Regional

—

235

—

—

235

—

235

Total passenger revenues

1,468

235

—

—

1,703

—

1,703

Revenue from CPA with Alaska

—

—

109

(109)

—

—

—

Freight and mail

26

1

—

(1)

26

—

26

Other-net

214

17

1

1

233

—

233

Total operating revenues

1,708

253

110

(109)

1,962

—

1,962

Operating expenses

Non-fuel operating expenses

1,156

226

104

(112)

1,374

30

1,404

Fuel expense

358

52

—

—

410

(14)

396

Total operating expenses

1,514

278

104

(112)

1,784

16

1,800

Nonoperating income (expense)

Interest income

12

—

—

(3)

9

—

9

Interest expense

(24)

—

(4)

2

(26)

—

(26)

Other

3

—

—

1

4

—

4

Total Nonoperating income (expense)

(9)

—

(4)

—

(13)

—

(13)

Income (loss) before income tax

$

185

$

(25)

$

2

$

3

$

165

$

(16)

$

149

Three Months Ended December 31, 2016

(in millions)

Mainline(a)

Regional

Horizon

Consolidating & Other

Air Group Adjusted(b)

Special Items(c)

Consolidated

Operating revenues

Passenger

Mainline

$

1,062

$

—

$

—

$

—

$

1,062

$

—

$

1,062

Regional

—

226

—

—

226

—

226

Total passenger revenues

1,062

226

—

—

1,288

—

1,288

Revenue from CPA with Alaska

—

—

102

(102)

—

—

—

Freight and mail

25

2

—

(1)

26

—

26

Other-net

192

17

1

—

210

—

210

Total operating revenues

1,279

245

103

(103)

1,524

—

1,524

Operating expenses

Non-fuel operating expenses

776

189

102

(103)

964

81

1,045

Fuel expense

207

35

—

—

242

(4)

238

Total operating expenses

983

224

102

(103)

1,206

77

1,283

Nonoperating income (expense)

Interest income

7

—

—

—

7

—

7

Interest expense

(19)

—

(2)

(1)

(22)

—

(22)

Other

4

—

1

—

5

—

5

Total Nonoperating income (expense)

(8)

—

(1)

(1)

(10)

—

(10)

Income (loss) before income tax

$

288

$

21

$

—

$

(1)

$

308

$

(77)

$

231

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

Twelve Months Ended December 31, 2017

(in millions)

Mainline

Regional

Horizon

Consolidating & Other

Air Group Adjusted(b)

Special Items(c)

Consolidated

Operating revenues

Passenger

Mainline

$

5,858

$

—

$

—

$

—

$

5,858

$

—

$

5,858

Regional

—

960

—

—

960

—

960

Total passenger revenues

5,858

960

—

—

6,818

—

6,818

Revenue from CPA with Alaska

—

—

426

(426)

—

—

—

Freight and mail

110

4

—

—

114

—

114

Other-net

922

74

4

1

1,001

—

1,001

Total operating revenues

6,890

1,038

430

(425)

7,933

—

7,933

Operating expenses

Non-fuel operating expenses

4,257

851

427

(427)

5,108

118

5,226

Fuel expense

1,282

172

—

—

1,454

(7)

1,447

Total operating expenses

5,539

1,023

427

(427)

6,562

111

6,673

Nonoperating income (expense)

Interest income

39

—

—

(5)

34

—

34

Interest expense

(92)

—

(13)

2

(103)

—

(103)

Other

14

—

2

—

16

—

16

Total Nonoperating income (expense)

(39)

—

(11)

(3)

(53)

—

(53)

Income (loss) before income tax

$

1,312

$

15

$

(8)

$

(1)

$

1,318

$

(111)

$

1,207

Twelve Months Ended December 31, 2016

(in millions)

Mainline(a)

Regional

Horizon

Consolidating & Other

Air Group Adjusted(b)

Special Items(c)

Consolidated

Operating revenues

Passenger

Mainline

$

4,098

$

—

$

—

$

—

$

4,098

$

—

$

4,098

Regional

—

908

—

—

908

—

908

Total passenger revenues

4,098

908

—

—

5,006

—

5,006

Revenue from CPA with Alaska

—

—

424

(424)

—

—

—

Freight and mail

104

5

—

(1)

108

—

108

Other-net

738

74

4

1

817

—

817

Total operating revenues

4,940

987

428

(424)

5,931

—

5,931

Operating expenses

Non-fuel operating expenses

2,883

769

407

(425)

3,634

117

3,751

Fuel expense

719

125

—

—

844

(13)

831

Total operating expenses

3,602

894

407

(425)

4,478

104

4,582

Nonoperating income (expense)

Interest income

26

—

1

—

27

—

27

Interest expense

(42)

—

(9)

(4)

(55)

—

(55)

Other

19

—

1

4

24

—

24

Total Nonoperating income (expense)

3

—

(7)

—

(4)

—

(4)

Income (loss) before income tax

$

1,341

$

93

$

14

$

1

$

1,449

$

(104)

$

1,345

(a)

Includes Alaska activity for the full period, and Virgin America financial results for the period December 14, 2016 through December 31, 2016, and the impacts associated with purchase accounting as of December 14, 2016.

(b)

The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.

Consolidated and Mainline amounts presented below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016.

CASM Excluding Fuel and Special Items Reconciliation (unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

(in cents)

2017

2016

2017

2016

Consolidated:

Total operating expenses per ASM (CASM)

11.32

¢

11.25

¢

10.75

¢

10.38

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

2.49

2.09

2.33

1.88

Special items—merger-related costs

0.19

0.71

0.19

0.27

CASM, excluding fuel and special items

8.64

¢

8.45

¢

8.23

¢

8.23

¢

Mainline:

Total operating expenses per ASM (CASM)

10.52

¢

10.33

¢

9.92

¢

9.39

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

2.37

1.98

2.24

1.79

Special items—merger-related costs

0.21

0.78

0.21

0.30

CASM, excluding fuel and special items

7.94

¢

7.57

¢

7.47

¢

7.30

¢

Fuel Reconciliations (unaudited)

Three Months Ended December 31,

2017

2016

(in millions, except for per gallon amounts)

Dollars

Cost/Gal

Dollars

Cost/Gal

Raw or "into-plane" fuel cost

$

406

$

1.98

$

238

$

1.65

Losses on settled hedges

4

0.02

4

0.03

Consolidated economic fuel expense

$

410

$

2.00

$

242

$

1.68

Mark-to-market fuel hedge adjustments

(14)

(0.07)

(4)

(0.03)

GAAP fuel expense

$

396

$

1.93

$

238

$

1.65

Fuel gallons

205

144

Twelve Months Ended December 31,

2017

2016

(in millions, except for per gallon amounts)

Dollars

Cost/Gal

Dollars

Cost/Gal

Raw or "into-plane" fuel cost

$

1,437

$

1.80

$

828

$

1.49

Losses on settled hedges

17

0.02

16

0.03

Consolidated economic fuel expense

$

1,454

$

1.82

$

844

$

1.52

Mark-to-market fuel hedge adjustments

(7)

—

(13)

(0.02)

GAAP fuel expense

$

1,447

$

1.82

$

831

$

1.50

Fuel gallons

797

554

Note A: Pursuant to Regulation G, we are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

By eliminating fuel expense and certain special items (including merger-related costs, changes resulting from the Tax Cuts and Jobs Act, and certain state tax law enactments) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

Cost per ASM (CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.

CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

GLOSSARY OF TERMS

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or "capacity"; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan, and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest, and PenAir. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile